Twitter (TWTR) will report their Q1 results tomorrow before the open. The options market is implying about a 10% move in either direction tomorrow, which is shy of the nearly 12% average over the last four quarters, and the 12.5% average since its 2013 IPO.
Shares of TWTR are up 19%. slightly underperforming the Nasdaq’s 20.% YTD gains, and well below social peers, Snap Inc’s (SNAP) 107% YTD gain and Facebook’s (FB) 37% ytd gains.
The stock has found considerable technical resistance over the last year or so in the mid $30s with very good technical support in the mid $20s:
Wall Street analysts are fairly mixed on the stock with 10 Buy ratings, 22 Holds and 6 Sells with an average 12-month price target of about $33.50, below where the stock is trading. One of those Hold rated analysts, Mark Mahaney of RBC Capital Markets suggested in a note to clients that Q1 estimates seem achievable:
Based on intra-quarter data points and our model sensitivity work, we view Street estimates as very reasonable for the March quarter, with a significant chance of upside variance vs. the Street on the top- and bottom-lines. And in terms of the Q2:19 guide, we also view Street Revenue (6% Q/Q growth) and Operating Margin (8% Margin) estimates, as at least bracketable with room for upside.
While Q1 seems “very reasonable” its worth noting that Mahaney does not seem inclined to step in front of the print as most trends in TWTR’s business clock in as Neutral to Negative, emphasis mine:
Intra-Quarter Data Point: 1) Neutral Traffic Trends: Based on Q1 U.S. Multi-platform data, we saw neutral comScore traffic trends for Twitter. U.S. Multi-Platform Unique Visitors declined (5%) Y/Y in Q1, decelerating from (2%) declines in Q4 but on a 7-pt harder comp. 2) Neutral-to- Negative Ad Age Survey Results: In April, RBC & Ad Age surveyed over 2,000 advertising professionals for our 13th Semi-Annual Advertiser survey. This iteration, Twitter continued its decline in Future Spend Intentions with a record-low 23% of advertisers looking to increase their spend on the platform vs. 36% last March, tho still a positive skew overall.
In Mahaney’s Key Items to Focus On, he sees better trends in user growth, monthly active users and monetization, emphasis mine:
1) User Growth: We anticipate Q1:19’s mDAU growth to be up 10% Y/Y vs up 11% Y/Y in Q4, or a net Q/Q increase of 6MM mDAUs due to continued platform security initiatives (vs. +2MM in Q4 and +6MM in Q1:18) to 132MM mDAUs. For Q1, we are also forecasting U.S. mDAUs to grow 7% Y/Y or 1MM Q/Q to 28MM. 2) Revenue Growth Trends: We are forecasting Ad revenue growth of 15% Y/ Y (vs. 23% Y/Y in Q4) to $660MM. The company’s other revenue line is Data & Licensing. We expect this segment’s growth to decelerate slightly to 31% Y/Y in Q1, reaching $117MM. 3) Monetization (Ad Revenue/MAU): For Q1, we are estimating $5.01 in Ad Revenue / mDAU, which would be up 4% Y/Y.
My Take into the Print: Adjusted eps for 2019 is expected to be flat from 2018’s 86 cents a share, trading at about 40x that with 15% expected sales growth. The company’s balance sheet is in great shape, with $3.5 billion in cash net cash of their $2.7 billion in debt on a $26 billion market cap. This is a tough call, despite modest expectations for the quarter, a miss and guide down and the stock gives back much of its 15% gains since the start of March. A beat and raise and the stock likely gets re-rated and attempts to fill in some of the gap from last summer possibly to the high $30s.
So what’s the trade?
If I were inclined to play for a miss and guide lower targeting $30 to the downside I might give myself a few weeks for it to play out, not that you would need it on a large miss, but just to make the trade less binary. I might consider the following put spread in May expiration:
Bearish Trade Idea: TWTR ($34.35) Buy May 34 – 29 put spread for $1.50
-Buy to open 1 May 34 put for 1.85
-Sell to open 1 May 29 put at 35 cents
Break-even on May expiration:
Profits of up to 3.50 between 32.50 and 29 with max gain of 3.50 below 29
Losses of up to 1.50 between 32.50 and 34 with max loss of 1.50 at 34 or higher
If I were inclined to play for a beat and raise, and a move back to the high $30s I might consider the following call spread risk-reversal:
Bullish Trade Idea: TWTR ($34.30) Buy May 30put / 35 – 39 call spread risk reversal for 65 cents
-Sell to open 1 May 30 put at 50 cents
-Buy to open 1 May 35 call for 1.65
-Sell to open 1 May 39 call at 50 cents
Break-even on May expiration:
Profits of up to 3.35 between 35.65 and 39 with max gain of 3.35 above 39
Losses of up to 65 cents between 35.65 and 35. loss of 65 cents below 35. Worst case stock is below 30, down 12.5% and you would be put 100 shares of stock at 30 and suffer losses on that below 30, plus the 65 cent premium loss.
One would only sell a put if they are willing to be put the stock at that the short strike price.